The turmoil surrounding Italy's third-largest bank hasrocked the country's financial establishment and exposed boththe government and the Bank of Italy to difficult questions overhow the risky deals could have been hidden from regulators.

It has also become a potentially explosive political issueahead of national elections on Feb. 24-25.

The Tuscan bank, which is already seeking a 3.9 billion euro($5.2 billion) government bailout, this week revealedloss-making derivatives and structured finance trades that couldcost it as much as 720 million euros.

Prime Minister Mario Monti, appointed in 2011 at the heightof the euro zone debt crisis, promised "maximum clarity andtransparency" but denied his government shared responsibilityfor the crisis at the bank, which bills itself as the world'soldest.

He said the problems affected only Monte Paschi andexpressed "full and total confidence" in the Bank of Italy,which was headed by European Central Bank President Mario Draghiat the time the deals were made.

"Italian savers should know, and I think they know, thatItalian banks have been among the most solid during the crisis,"he said, adding that the problems at Monte Paschi did not affectthe rest of the Italian banking sector.

Asked later on a TV talk show if Monte Paschi could benationalised, he said it was possible but would be a "remotehypothesis".

Economy Minister Vittorio Grilli is due to appear before theparliamentary finance committee next Tuesday to answer questionson the case and also endorsed the central bank's supervision.

Known as "Daddy Monte" because of its huge influence andpatronage, the bank plays a dominant role in Siena, known to tourists as the venue for the traditional Palio horse race.Monte Paschi, based in a magnificent palazzo, has an artcollection that spans six centuries.

However there was stinging criticism from furiousshareholders at a special meeting in the picturesque Tuscantown, where Monte dei Paschi was founded in 1472.

"It's as if they were playing poker at the casino, and themore money they were losing, the more they kept gambling," saidPietro Rizzo, a pensioner and former employee of the bank, whowas awarded shares as part of his severance payment.

"They were sinking and kept trying to find a way to stayafloat to hide the losses. They should have told the truth," hetold Reuters.

ANGER

Bank of Italy Governor Ignazio Visco rejected criticism ofthe central bank's oversight, and said the deals in question,apparently aimed at covering up losses, had been deliberatelyconcealed from authorities. He put the blame squarely on theMonte dei Paschi management at the time.

But Visco said there was no threat to the stability of Montedei Paschi, which is already under investigation for the9-billion-euro cash acquisition of smaller rival Antonveneta in2007 - a deal that stretched its finances to the limit monthsbefore the global financial crisis.

"There is no question that the bank is stable," he said.

In Siena, where Monte Paschi held the special shareholders'meeting on Friday, shareholders approved two capital increasesof up to 6.5 billion euros to be carried out if needed in thenext five years, which was a condition of the state bailout.

The capital increase would allow the bank to issue shares tothe Treasury if it cannot repay so-called "Monti bonds" it isselling to the government as part of the plan.

The bank's management faced the wrath of shareholdersangered by a scandal that has raised the spectre ofnationalisation and recalled some of the darkest financialscandals in recent Italian history.

According to judicial sources, magistrates are alreadylooking into one of the three main deals at the heart of thecase on suspicion of fraud and embezzlement by bank officials.

The issue has also forced its way into the election campaignbecause of the close links between the bank and the centre-leftDemocratic Party (PD), which is leading in the opinionpolls.

The left has run Siena, in one of the so-called "redregions" of Italy, for decades and although PD leader Pier LuigiBersani has dismissed any suggestion of a link with the crisis,the bank's main shareholder is a charitable foundationcontrolled by local authorities.

The town hall and the province of Siena, both run by the PD,name 13 out of the 16 board members at the foundation, which inturns picks the majority of the Monte Paschi board.